Tag Archive: digital

  1. Should Google be worried about Amazon?

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    It’s no secret that Amazon is no longer ‘just’ the world’s biggest retailer. Its ‘other’ business – digital advertising – is having a seismic impact on the advertising industry, so much so that is now a threat to the traditional digital advertising duopoly, Facebook and Google. This week, eMarketer released a report claiming that Amazon is ‘chipping away’ at the very core of Google’s business – search.

    Amazon is increasing its share of US digital ad spend

    Amazon’s star has been on the ascendant for a significant period of time, but 2019 has truly been a stellar year. Revenue for its ad business climbed by 37% to $3 billion in the second quarter of 2019, while back in February eMarketer predicted that Amazon would claim 8.8% of US digital adspend this year, up from 6.8% in 2018. This is impressive in itself, but even more so when you consider that Google’s share was predicted to drop to 37.2%, down from 38.2% in 2018, while Facebook would only increase theirs by 0.3%.

    Google’s near-monopoly of search is set to decrease

    This was the backdrop for the latest eMarketer report about Amazon’s search share. The US search market is set to grow by 17% this year, to a huge $55.17 billion. While Google still of course owns the lion’s share of the market, with 73.1% ($40.3bn), eMarketer anticipates that that will fall to 70.5% by 2021. Amazon, on the other hand, is expected to have grown its share of the market to 12.9% by the end of 2019, and to 15.9% in 2021. Microsoft has now been relegated to third place in the search market, with a 6.5% share.

    What’s behind Amazon’s success in the space?

    So what is behind Amazon’s increasing prominence in digital advertising? The key reason is its understanding of consumers’ purchasing behaviours. It has a treasure trove of data about buying habits which is of course very valuable for advertisers, as they can reach customers right at the time that they intend to make a purchase. Amazon’s data even allows advertisers to understand when a buyer might want to repurchase a product, so that they can be targeted at the right time, with less wastage.

    Consumers’ research behaviour is changing as well: they now increasingly use Amazon as a research resource rather than just a purchasing platform, and use broader search terms such as ‘gift’ or ‘makeup’, offering ample opportunities for brands to reach them. And it’s not just brands that sell directly on Amazon that can benefit; advertisers that sell products and services that can’t be bought on Amazon, such as cars or insurance, can use the retailer’s extensive customer data to understand who might be interested in buying their products. Finally, Amazon has very high conversion rates, particularly for products sold on their platform: 20-30%, versus 1-10% on Facebook, for example, where ads are seen as more intrusive and trust is an issue.

    Harnessing its advantages

    Amazon has wasted no time in harnessing these advantages over its competitors. Last year, it simplified the branding for its advertising products, creating Amazon Advertising. This includes sponsored ads which work in a similar way to Google search, allowing advertisers to bid for search terms, with the highest bidders more likely to appear in ad listings. Display ads are available programmatically for both Amazon and third-party sites using the Amazon DSP, which allows advertisers to see easily how well their media spend translates into sales.

    In 2018, Amazon acquired Sizmek’s adserving and dynamic creative units; the dynamic creative allows for more tailored ads which incorporate data such as location or shopper behaviour, while the ad server side helps advertisers to place ads and measure effectiveness, helping Amazon to better compete with Google. Overall, these acquisitions have helped Amazon improve the functionality that had been lacking in comparison to its two major competitors in the digital advertising space.

    An unexpected benefit for both Google and Amazon

    While Google will no doubt be alarmed that Amazon is encroaching on its search dominance, there is something of a silver lining. Both organisations are being examined by regulators at the Department of Justice and the Federal Trade Commission – Google because of its search stranglehold and Amazon for using its e-commerce marketplace to promote its own brands over those of rivals. While these investigations continue, it won’t hurt either of them to have increased perception of competition.

    An increasingly important player

    As Amazon increases its functionality and collects and organises evermore customer data, it will become an increasingly important player in the digital advertising sector and undoubtedly an ever more worthy recipient of valuable ad dollars. Advertisers – even those that don’t sell via the platform itself – should seriously consider Amazon’s advertising solutions for three reasons: lower pricing thanks to increased competition in the search space; remarkable conversion rates; and Amazon’s wealth of rich data from its sales funnel.

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  2. Is Netflix ready for the launch of rival platforms?

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    Make or break for Netflix

    A couple of weeks ago, Bank of America Merrill Lynch told clients that Netflix’s Q3 figures, out later today, would be ‘make or break’ for the streaming platform, and would indicate whether it would be able to effectively compete with new rival platforms from the likes of Disney and Apple. It’s been a difficult few months for Netflix – its share value has plummeted by nearly 30% in the last three months, and subscriber levels fell short of the company’s own guidance in Q2. Whether those subscriber levels have recovered will be of particular interest in the Q3 results – and investors will be looking for signals that they can retain that recovery as competitors launch their streaming platforms.

    Who are the competition?

    So what does the competition look like for Netflix? Apple and Disney are launching their streaming services next month: Apple TV+ on 1st November, and Disney Plus on 12th November in the US, Canada and the Netherlands, with other markets in the months afterwards. This makes strategic sense, particularly for Disney, as it can piggyback on the marketing for its big-budget holiday-season films, and Netflix has shown over the last few years that it gets its biggest viewership in the last couple of months of the year. WarnerMedia’s HBO Max and NBCUniversal’s streaming service will be launching in early 2020. So Netflix’s battle to keep its subscribers loyal – and grow its customer base – starts now. Convergence Research Group, which tracks the streaming industry, predicts that its 47% share of the streaming market in 2018 will decrease to 34% by 2022, as reported in an LA Times article.

    Original content will be increasingly important

    This decrease will in part be down to the fact that Netflix will be losing some of its most watched shows to its competitors: ‘Friends’, for example, will go to WarnerMedia’s streaming service in early 2020, while ‘The Office’ will be shown by NBCUniversal from January 2021. With adults spending only around 30% of the time they spend with Netflix watching Netflix Original content, it looks like this could have an effect on Netflix’s subscriber numbers.

    However, Bank of America Merrill Lynch told investors that he believes Netflix will have time to ramp up production of original content while its rivals work on building their subscriber bases. This will means that Netflix will need to continue its huge investment into original content – this year it is estimated to have spent around $16 billion dollars, and Pivotal Research Group estimates that this will have climbed to a giant $35 billion by 2025. This needs to be funded from somewhere and Netflix’s capacity to raise subscription fees – its fallback option to date – will be stymied by increased competition. Netflix could also consider increasing its debt, introducing ads, investing in innovation (such as the ‘Bandersnatch’ episode of ‘Black Mirror’, where viewers could choose what the main character did next), or harnessing the vast wealth of data they have on what people like to watch, and where.

    A core part of the streaming bundle?

    Netflix’s choppy year has made investors a little nervous, which is why so much rests on the figures that it is releasing today. But many think that things will be ok. Mark Mahaney, lead internet analyst at RBC Capital Markets, for example, told CNBC that most people will want to use more than one streaming service, and it’s likely that that will mean Netflix plus another – Netflix will be a core part of the bundle. He believes that Netflix has the scale advantage and better brand name, content, global distribution and partnerships than its competitors, which bodes well for the future. Time will tell!

    What does this mean for advertisers?

    TV is still a crucial medium for advertisers, but with viewers having more and more ad-free options from the new streaming platforms, it will become increasingly difficult to reach their hearts and minds. What’s more, they are likely to be less forgiving of higher ad loads on the ad-funded free-to-view channels. This means that the most effective media channels will likely become more expensive, and the wise ones may well have fewer, higher impact ad spots for which advertisers will pay a premium. Furthermore, the growth of addressable TV will allow for more targeted and therefore more engaging ads, and lower levels of rejection by the consumer.

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  3. What happened at WeWork?

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    WeWork has been lauded by many as one of the huge success stories of the 21st century. Before they came along, renting office space was run-of-the-mill, boring. You paid money, you got a room and installed some desks, some chairs, a printer. You moved in. That was it.

    Not just an office space

    WeWork, however, wants you to believe that you aren’t simply paying for space. Of course, you get a beautiful new office, but you are also paying to be a part of something new, part of a community of like-minded people. Indeed, part of WeWork’s mission is that it is “a place you join as an individual, ‘me’, but where you become part of a greater ‘we’.” WeWork positions itself amongst those big disruptors of this century – Netflix, Uber, even Facebook, and an IPO was a natural next step for this real estate/tech behemoth.

    A failed IPO

    Dreaming of a huge $47 billion valuation, the cash-hungry We Company, WeWork’s parent company, aimed to sell enough shares to raise $4 billion and had, according to the New York Times, ‘lined up a $6 billion bank loan that was contingent on the IPO’.  By the end of September, though, those heady days were over. WeWork discovered that investors were sceptical about their huge valuation, large amounts of debt and corporate governance issues. They pulled the IPO, Founder-CEO Adam Neumann was forced to step down, are looking at redundancies and are reconsidering their expansion strategy into China.

    Positioned as a tech firm

    So how did WeWork value itself so high? What was it doing right? A lot of it came down to brilliant brand-building and marketing. As touched on earlier in this piece and explored by Mark Ritson in this article, WeWork didn’t position itself as a real estate or office rental firm. It wanted to be seen as a tech firm, or, as Ritson says, there was a “vague, socially-constructed idea that this is another big disruptive tech firm with another massive IPO.” 21st century tech firms have of course seen phenomenal success over the past two decades, and many have an aura of community and purpose to humanise the vast profit they turn over. WeWork, with its mission to ‘Create a world where people work to make a life, not just a living” embodies that tech ethos, and as such pushes its community app. This wasn’t just a forward-thinking branding decision: if it worked, it was a sage financial decision, with tech companies raking in revenues far higher than those of more traditional businesses.

    Shaky foundations

    From the outside, this approach seemed to be working for WeWork: in the first half of 2019, for example, it earned $1.5 billion in revenue. However, the gloss loses its sheen a little when you discover that in the same period it lost almost $900m. And the sheen disappears completely in the context of information that it was looking to raise between $3 billion and $4 billion in debt to tide it over.

    A future in debt

    And that’s the key to this story: the losses and associated debt. While investors don’t necessarily insist that start-ups are profitable before they go public, it helps to be able to show a path to profitability. We Company’s revenue and operating losses are moving in tandem, rather than showing an increasing gap. They may find some cold comfort in the fact that they aren’t alone in this plight: ‘fellow’ disruptors Netflix and Uber, to name just two, show no sign of becoming profitable in the near or even mid-future. Netflix must continue its huge investment ($15 billion this year) into original content in order to survive stiff forthcoming competition in the shape of Disney, Amazon and Apple. To finance that, Netflix is estimated to have a debt of around $12 billion – and with a net income of just a twelfth of that, it seems unlikely that it will ever be able to pay that off.

    What does this all mean?

    Is WeWork’s failed IPO the first sign of a difficult, uncertain future for the big disruptive organisations of the last 10 years? Perhaps the tech disruptors of the future will bring the focus back to business strategy and creating revenue streams. Brand positioning and purpose are of course crucial to a business’ success, but they must be founded in a robust business and financial strategy to guarantee success.

    Disclosure: ECI Media Management’s UK office is a tenant of WeWork in London

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